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Automotive trends to watch in 2018

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January 05, 2018

Lawrence Keyler

Citing analysts’ expectations, the American International Automobile Association noted that the projected sale of 16.7 million vehicles in 2018 is “not too shabby.” This is good news, coming as it does after a year when sales for light vehicles overall were down slightly from the previous year, and passenger car sales in particular were down more than 10 percent.1

While the road ahead looks promising, there are a number of industry disrupters—technology, government regulations, personal mobility and changes in consumer expectations, to name a few—that will require careful navigation.

Learn more about the 2018 trends to watch in this brief video with Lawrence Keyler, automotive practice leader at RSM US LLP.

Technology

According to the Auto Alliance, automakers around the world spend more than $100 billion each year on research and development. To put that in perspective, the worldwide aerospace and defense industry accounted for 3.2 percent of R&D spending in 2017; automakers accounted for 15.5 percent.2 The innovations resulting from that spending are changing the way consumers drive—and the face of the industry.

The promise of connected vehicles, for example, offers safety and efficiency benefits for drivers. The car will be the ultimate manifestation of the internet of things, connecting vehicle and driver with stop lights, traffic sensors and other infrastructure elements that will help reduce accidents as well as suggest the quickest route to a destination. But the designs of core systems will need to evolve along with the technology.

One challenge facing OEMs and suppliers in the auto industry is the incredible speed at which connectivity solutions are changing. Auto manufacturers and their suppliers need to work closely with technology companies to develop the systems going into these new vehicles. The information that will be exchanged between the car, personal devices, the driver’s home and the cloud will result in a significant amount of data that will have to be sorted and held in a reliable and secure virtual environment.

Not surprisingly, this will require a highly skilled workforce for manufacturing and service at a time when skilled labor is at a premium. As the level of risk posed by technology and its vulnerabilities unfolds, car makers may need to turn to other industries, such as electronics and aerospace, to help build a safe, connected car.

Understanding those technologies―how they evolve and the impact they will have on the manufacturing process and supply chain―will be critically important. For now, however, it seems an affordable flying family car will have to wait a little longer.

Learn more about technology in this brief video with Lawrence Keyler, automotive practice leader at RSM US LLP.

Regulations

There is concern among automotive OEMs, suppliers and dealers that the current administration in Washington could withdraw from NAFTA, a step auto industry executives urge the administration not to take.3 A study sponsored by the Motor Equipment Manufacturers Association concluded that as many as 50,000 industry-related jobs could be lost and sales would drop precipitously due to proposals that would drive up vehicle production costs. In an effort to protect their margins as well as their substantial investments in highly efficient, North American supply chains, industry coalitions are promoting the North American Free Trade Agreement as a treaty that has been good for the industry and the U.S. economy.

There is general agreement among the three nations in the treaty, however, that NAFTA needs to be modernized, with broad support for stronger enforcement of workplace and environmental protections. Auto industry associations approve of such measures, but are encouraging the administration to approach any negotiations with care. Tier 1 and Tier 2 suppliers should be prepared for changes that could force them to consider sharing production facilities with competitors to maximize production and minimize costs.

Profitability

The emergence of ride-sharing and ride-hailing will continue to have an impact on the auto industry. Changes are already being seen in the demographics of vehicle owners. Millennials, for example, are less interested than baby boomers in buying cars, preferring the freedom of ride-hailing over the hassle of ownership. This could be the beginning of a trend towards specialized vehicles specifically built for these services—and the consequent reduction in the production and sale of private-use vehicles.4

As technology-driven costs go up and ride-hailing services become more popular, the low-budget car market will begin to disappear. Although there may be markets in many developing countries for low-cost vehicles, at some point pressure on production costs may push traditional lower-income consumers out of the ownership market. In order to maintain profitability, prices will need to rise for an ever-increasing percentage of tech-embedded vehicles, making ownership an option for a smaller, upper-income demographic.

In the 2016 Automotive Monitor survey, nearly half of aftermarket suppliers said they were planning new corporate strategies such as entering new markets or new locations in their efforts to boost profitability; a somewhat smaller percentage of OEM suppliers are pursuing similar efforts. OEM and aftermarket suppliers planned on increasing profits to a similar degree by reducing costs, increasing pricing or discontinuing underperforming products.

Too often the first margin improvement strategy is simply to increase prices. But a sophisticated margin improvement plan will also recognize that some products may require lower prices, whether for new sales channels or to differentiate them as “economy” versions of competitor offerings. If it’s not already clear, the coming months should show which of these strategies are paying off.

Supply chains

As technology becomes a greater component in the auto supply chain, suppliers will have to compete or work with a new set of competitors—many of them from outside the auto industry. Technology and innovation is going to drive consolidation in the industry, particularly in the supplier base. The cost of R&D can be prohibitively expensive for suppliers, forcing them to look for partners or joint ventures in order to stay competitive in the global marketplace.

At some point, consumers may not be buying vehicles from a car dealer but from a technology company. How that car is manufactured will represent a dramatic shift in the industry. To see a return on their investments in technology and R&D, suppliers will need to expand beyond their traditional supply chains and distribution channels.

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